Monday, 30 January 2012

"Does the future look as black as they paint it?" I ask myself when I see some stock market analysts recommend getting out of US shares and investing in foreign companies. Today the prevalent opinion is a mixture of distrust and hesitation.

I have a different view and I am acting on it in my own investments. If I am right, the present days might be remembered as the best period in modern History to invest in US shares. If I am wrong, I am risking my own money and I will take the consequences.

In investments, like in most things in life, it all boils down to using the right methodology. How can we determine what is true? What facts are relevant? Which predictions make sense? Can we figure out the future by applying principles extracted from experience?

Investment analysts who take stand against US stocks are basing their forecast on a likely loss of value of the US dollar. They say that they are expecting high inflation in the US within the next two years. To which extent is their anticipation in line with facts?

Forecasting a US dollar decline agrees with fundamental economic theory. "The high levels of US debt are unsustainable in the long term," argue those who predict a drastic loss of value of the US dollar. Indeed, it is logical to assume that printing dollars to pay off US debt would result in diminished purchasing power for each banknote, but is this really true?

There is valid logic in this analysis, but we should also ask ourselves if the premises are complete. Yes, it seems likely that dollars will have to be printed to pay off US debt, but on the other hand, global demand for US bank notes is increasing. How come?

The answer lies in Central and South America, Africa, Asia, and the Middle East, where millions of individuals have adopted the US dollar as everyday currency in their transactions. Daily utilization of US banknotes for business and private needs is no longer privy to North American citizens.

Why are millions of people all over the world using US dollars in their sales and purchases? Because in their eyes, the American currency stands for political stability, an overall reliable legal system, protection of intellectual property, entrepreneurial companies, hard-working executives and employees, and rapid innovation. This perception, I submit, is not going to change in the near future.

Printing additional dollars may well lead to inflation, possibly between 5% and 15%, but is it reasonable to expect a collapse of the US currency? To which extent should one act according to that expectation? When it rains heavily, rivers do carry additional water, but do they raise the sea level?

For my own investments, I am assuming that some inflation will take place, but frankly, I don't see that as the end of the world. A weaker dollar will increase US manufacturing exports and boost the impact of overseas profits for US multinationals. Both aspects would play in favour of a rising US stock market.

[Text: http://johnvespasian.blogspot.com]

[Image by Ignotus the Mage under Creative Commons Attribution License. See the license terms under http://creativecommons.org/licenses/by/3.0/us]

"Does the future look as black as they paint it?" I ask myself when I see some stock market analysts recommend getting out of US shares and investing in foreign companies. Today the prevalent opinion is a mixture of distrust and hesitation.

I have a different view and I am acting on it in my own investments. If I am right, the present days might be remembered as the best period in modern History to invest in US shares. If I am wrong, I am risking my own money and I will take the consequences.

In investments, like in most things in life, it all boils down to using the right methodology. How can we determine what is true? What facts are relevant? Which predictions make sense? Can we figure out the future by applying principles extracted from experience?

Investment analysts who take stand against US stocks are basing their forecast on a likely loss of value of the US dollar. They say that they are expecting high inflation in the US within the next two years. To which extent is their anticipation in line with facts?

Forecasting a US dollar decline agrees with fundamental economic theory. "The high levels of US debt are unsustainable in the long term," argue those who predict a drastic loss of value of the US dollar. Indeed, it is logical to assume that printing dollars to pay off US debt would result in diminished purchasing power for each banknote, but is this really true?

There is valid logic in this analysis, but we should also ask ourselves if the premises are complete. Yes, it seems likely that dollars will have to be printed to pay off US debt, but on the other hand, global demand for US bank notes is increasing. How come?

The answer lies in Central and South America, Africa, Asia, and the Middle East, where millions of individuals have adopted the US dollar as everyday currency in their transactions. Daily utilization of US banknotes for business and private needs is no longer privy to North American citizens.

Why are millions of people all over the world using US dollars in their sales and purchases? Because in their eyes, the American currency stands for political stability, an overall reliable legal system, protection of intellectual property, entrepreneurial companies, hard-working executives and employees, and rapid innovation. This perception, I submit, is not going to change in the near future.

Printing additional dollars may well lead to inflation, possibly between 5% and 15%, but is it reasonable to expect a collapse of the US currency? To which extent should one act according to that expectation? When it rains heavily, rivers do carry additional water, but do they raise the sea level?

For my own investments, I am assuming that some inflation will take place, but frankly, I don't see that as the end of the world. A weaker dollar will increase US manufacturing exports and boost the impact of overseas profits for US multinationals. Both aspects would play in favour of a rising US stock market.

[Text: http://johnvespasian.blogspot.com]

[Image by Ignotus the Mage under Creative Commons Attribution License. See the license terms under http://creativecommons.org/licenses/by/3.0/us]

ABOUT THE AUTHOR

JOHN VESPASIAN is the author of eight books about rational living, including "When Everything Fails, Try This" (2009), "Rationality Is the Way to Happiness" (2009), "The Philosophy of Builders: How to Build a Great Future with the Pieces from Your Past" (2010), "The 10 Principles of Rational Living" (2012), "Rational Living, Rational Working: How to Make Winning Moves When Things Are Falling Apart" (2013), "Consistency: The Key to Permanent Stress Relief" (2014), "On Becoming Unbreakable: How Normal People Become Extraordinarily Self-Confident" (2015), and "Thriving in difficult times: Twelve lessons from Ancient Greece to improve your life today" (2016).